Google's parent company Alphabet may have topped expectations when it reported Q2 earnings Monday, but that didn't keep the stock from slipping about 3% in after-hours trading.
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Google’s payments to partners are the highest in 8 years and Wall Street is not happy (GOOG, GOOGL)
Traffic acquisition costs continue to grow, worrying investors.
One reason could be the increasing traffic acquisition costs (TAC). Google has to share some of its mobile ad revenue with partners who bring users to its search engine or who run Google ads on their own websites.
These partners include companies like Apple, which has made Google the default search engine on the iPhone, and the various websites that integrate Google's advertising products.
Total TAC last quarter was $5.09 billion, up from $3.98 billion a year ago. That's 22% of all of Google's ad revenue, according to Monday's earnings report. TAC was 21% of Google's revenue a year ago.
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But the situation is more striking if you look at the number more closely:
- the highest level since 2009
- largest such increase in any quarter since 2008
Alphabet's CFO Ruth Porat noted on the company's earnings call Monday that she expected some traffic acquisition costs to continue to rise. She said that the increase in mobile searches and programmatic advertising were responsible for the rising TAC. But Porat characterized it as a positive, since the rising payouts to partners reflecting the increasing use of Google's service.
"It really provides another lens on just how strong our mobile business is," Porat told one analyst in response to a question about the rising TAC costs.
And while Google is paying out more TAC, Porat stressed, the company is also growing its overall profit dollars.
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